Orthodox economic historians have long complained about
the “great depression” that is supposed to have struck the
United States in the panic of 1873 and lasted for an unprecedented
six years, until 1879. Much of this stagnation is supposed
to have been caused by a monetary contraction leading to
the resumption of specie payments in 1879. Yet what sort of
“depression” is it which saw an extraordinarily large expansion
of industry, of railroads, of physical output, of net national
product, or real per capita income? As Friedman and Schwartz
admit, the decade from 1869 to 1879 saw a 3-percent-perannum
increase in money national product, an outstanding
real national product growth of 6.8 percent per year in this
period, and a phenomenal rise of 4.5 percent per year in real
product per capita. Even the alleged “monetary contraction”
never took place, the money supply increasing by 2.7 percent
per year in this period. From 1873 through 1878, before
another spurt of monetary expansion, the total supply of bank
money rose from $1.964 billion to $2.221 billion—a rise of 13.1
percent or 2.6 percent per year. In short, a modest but definite
rise, and scarcely a contraction.
It should be clear, then, that the “great depression” of the 1870s
is merely a myth—a myth brought about by misinterpretation of
the fact that prices in general fell sharply during the entire
period. Indeed they fell from the end of the Civil War until 1879.
Friedman and Schwartz estimated that prices in general fell
from 1869 to 1879 by 3.8 percent per annum. Unfortunately,
most historians and economists are conditioned to believe that
steadily and sharply falling prices
must
result in depression:
hence their amazement at the obvious prosperity and economic
growth during this era. For they have overlooked the fact that
in the natural course of events, when government and the banking
system do not increase the money supply very rapidly, freemarket
capitalism will result in an increase of production and
economic growth so great as to swamp the increase of money
supply. Prices will fall, and the consequences will be not depression
or stagnation, but prosperity (since costs are falling, too)
economic growth, and the spread of the increased living standard
to all the consumers.